In: Accounting
Summer Company sells
all its output at 25 percent above cost. Parade Corporation
purchases all its inventory from Summer. Selected information on
the operations of the companies over the past three years is as
follows:
Summer Company | Parade Corporation | |||||||||||||
Year | Sales to Parade Corp. | Net Income | Inventory, Dec. 31 | Operating Income | ||||||||||
20X2 | $ | 210,000 | $ | 118,000 | $ | 73,500 | $ | 160,000 | ||||||
20X3 | 185,000 | 108,000 | 111,000 | 248,000 | ||||||||||
20X4 | 237,000 | 178,000 | 126,400 | 312,000 | ||||||||||
Parade acquired 70 percent of the ownership of Summer on January 1,
20X1, at underlying book value.
Required:
Compute consolidated net income and income assigned to the
controlling interest for 20X2, 20X3, and 20X4.
Answer:
Profit made by Summer Company = 25% on Cost = 20% on Sales
Calculation of net Income of Summer Company after Deducting Unrealised Profit
Year | Sale ($) | Unrealised Profits ($) | Net Income ($) | Income Net of unrealised profits ($) |
(1) | (2)=(1)*20% | (3) | (4)=(3)-(2) | |
20X2 | $210,000 | $42,000 | $118,000 | $76,000 |
20X3 | $185,000 | $37,000 | $108,000 | $71,000 |
20X4 | $237,000 | $47,400 | $178,000 | $130,600 |
Calculation of Net Income of Parade Company after deducting Unrealised Profit
Year | Inventory ($) | Unrealised Profit ($) | Operating Income ($) | Operating Income Net of Unrealised profit ($) |
(1) | (2)=(1)*20% | (3) | (4)=(3)-(2) | |
20X2 | $73,500 | $14,700 | $160,000 | $145,300 |
20X3 | $111,000 | $22,200 | $248,000 | $225,800 |
20X4 | $126,400 | $25,280 | $312,000 | $286,720 |
Calculation of Consolidated Net Income of Parade Company and Income Assigned to Controlling Interest
Year | Income Net of Unrealised Profit ($) |
Share in Net Income of SummerCompany @ 70% ($) (Income Assigned to controlling Interest) |
Consolidated Income ($) |
(1) | (2) | (3) = (1)+(2) | |
20X2 | $145,300 | 76,000*70%= $53,200 | $198,500 |
20X3 | $225,800 | 71,000*70%=$49,700 | $275,500 |
20X4 | $286,720 | 130,600*70%=$91,420 | $378,140 |